A scalper's life is ...
I'm often asked about trading for a living. I hope this graphic helps to illustrate the differences between intra-day trading (scalping) and medium term trading (1 to 3 days). If a trader has a 50:50 win/loss ratio (=1) and risks say $100 to win $100, i.e. his reward:risk ratio is also 1, then he will breakeven over time. To become profitable, the intra-day scalper has to trade often so that he can grab small moves. He uses a loose stop to avoid being stopped out by the volatility. This means having a reward:risk ratio less than 1. Looking at point X, a scalper stays in the green, profitable area by winning more than he loses. He can then tolerate say 30 pip stops with profit targets of 20. Reward:risk ratios below 1 are a way of life for intra-day forex scalpers. Having such low ratios defies conventional trading wisdom. However, as the chart shows, low R:R ratios can be compensated for by larger win-to-loss ratios. Medium term traders, on the other hand, trade less often and win less often. They need greater reward:risk ratios to survive. What does 'trade often' actually mean? In general terms, you should be aiming for 7,500 to 10,000 points per year. Over time, the net points per trade are about +6, therefore an intra-day forex scalper needs to trade say 8,700/6 = 1,450 times per year or 145 times per month allowing for holidays. From these rough calculations, you can see, an intra-day trader has to transact about 7 to 8 times a trading day. The more successful traders I know, regularly trade three sessions a day to do this. There is an obvious temptation to trade less but put more on per trade. Everyone wants an easier life. However doing this is very stressful and there can be prolonged periods of drawdown which really mess with your trading head! Regards Morty Sill London |